GUIDE TO CAPITAL GAINS TAX

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GUIDE TO CAPITAL GAINS TAX

This guide is intended to outline, in very broad terms, the key principles that areenvisaged to form part of the proposed capital gains tax (CGT) legislation in SouthAfrica. Comments by interested parties in respect of this guide and the principles itsets out, as well as any other issues pertaining to CGT, are invited before 31 March2000. Correspondence should be addressed to:

Capital Gains TaxCommissioner for the South African Revenue ServiceP.O. Box 402Pretoria0001

Alternatively, comments may be e-mailed to:

[email protected] [email protected]

General inquiries in respect of CGT may be directed to the contact personnel listed onpages 32 and 33. An up to date list of frequently asked questions and their answerswill also be available at SARS Online and the Department of Finance’s web sitelocated at:

http://www.sars.gov.za orhttp://www.finance.gov.za

Acknowledgements:

Foreign Assistance Program

Pretoria 23 February 2000

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INDEX

Topic Page

1. INTRODUCTION 4

a) Why are we introducing a CGT? 4

b) What are the economic issues in respect of introducing CGT? 5

c) What does all this mean to you the taxpayer? 5

2. CHARACTERISTICS OF CGT 7

a) Who is liable to pay CGT? 7

b) What are affected capital assets? 8

c) What is included in the base cost of an affected capital asset? 8

• Acquisition costs 8• Incidental costs of acquisition and disposal 8• Capital costs of maintaining title or rights to the asset 9• Improvement / enhancement costs 9• VAT 9

d) When is CGT triggered? 10

e) What will be exempted? 11

• A primary / principal owner-occupied residence 11• Private motor vehicles 11• Personal belongings and effects 11• Lump sum benefits – superannuation & life assurance policies 12• Compensation for personal injury, illness, or defamation 12• Betting, lotteries & competitions 12• Foreign legal tender for personal use 12• Gains or losses made by foreign government agencies 12• Small-business assets, where proceeds are used for retirement 12• Institutions fully exempt from normal taxation 12

f) Rollover (deferral) of certain capital gains? 12

• Transfers between members of wholly owned groups 13• Transfers by up to 5 persons to a Company or CC 13• Transfers of business assets to a Company, for at least 20% 13• Transfers of property from a deceased estate to heirs 13• Donations of property to a donee 13• Transfers between spouses 13

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• Transfers – rationalisation, unbundling, reorganisation etc. 13• Involuntary disposals 13• Business asset disposal and re-investment 13

g) How are capital gains / losses determined? 14

h) Are there any anti-avoidance measures? 16

i) What if an affected asset is acquired before the effective date? 17

j) Is there any relief on the inclusion of a capital gain in taxable income? 21

k) What other issues might be of concern? 22

• Unit trusts / property unit trusts 22• Long-term insurers 22• Retirement funds tax 22• Disposal of shares 22• Consideration (payment) due after the time of disposal 24• Cancelled transactions 25• Forfeiture of a deposit 26• Part-disposals of capital assets 26• Depreciable assets 27

l) What records need to be kept? 29

m) What are the administrative procedures for CGT? 31

3. CONTACT PERSONNEL – At the South African Revenue Service 32

4. FLOWCHART – Simplified overview of the CGT process 34

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1. INTRODUCTION

a) Why are we introducing a CGT?

The absence of a CGT creates many distortions in the economy, byencouraging taxpayers to convert otherwise taxable income into tax-freecapital gains. The South African Revenue Service has observed thatsophisticated taxpayers have engaged in these conversion transactions, therebyeroding the corporate and individual income tax bases. This erosion reducesthe efficiency and equity of the overall tax system. A CGT is, therefore, acritical element of any income tax system as it protects the integrity of thepersonal and corporate income tax bases and can materially assist inimproving tax morality.

When CGT was introduced in the United Kingdom in 1965, the followingnoteworthy comments were made.

“The failure to tax capital gains is widely regarded … as the greatest blot onour existing system of direct taxation. There is little dispute nowadays thatcapital gains confer much the same kind of benefit on the recipient as taxedearnings more hardly won. Yet earnings pay tax in full while capital gains gofree. This is unfair to the wage earner. It has in the past been one of thebarriers to the progress of an effective incomes policy … Moreover, there isno doubt that the present immunity from tax of capital gains has given apowerful incentive to the skillful manipulator of which he has taken fulladvantage to avoid tax by various devices which turn what is really taxableincome into tax-free capital gains.”

The Carter Commission’s recommendations in 1966 in respect of theCanadian tax system and CGT state;

“A dollar gained through the sale of a share, bond or piece of real propertybestows exactly the same economic power as a dollar gained throughemployment or operating a business.”

Internationally, the idea of such a tax is not uncommon, with many of ourtrading partners having implemented CGT decades ago.

The question of the introduction of a CGT is also not new in the South Africancontext, as various Tax Commissions have considered its possibleimplementation.

The Franzsen Commission in 1969 proposed a limited form of CGT onimmovable property and marketable securities. The majority recommendationof the Margo Commission in 1986 was that capital gains should not besubjected to tax. The Katz Commission, on the other hand, acknowledged thecase for a tax on capital gains, while recommending that it should not beimplemented due to its complexity and the capacity of the tax administrationat that time (1995).

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In view of the benefits CGT offers and the enhanced administrative capacityof SARS, the time is now right for Government to implement a CGT.Understandably, this step could give rise to many difficulties and,consequently, it is proposed that the tax will only become effective from1 April 2001. In the interim, further research and consultation will take place.Draft legislation will also be made available for comment prior to the finalimplementation of CGT.

b) What are the economic issues in respect of introducing CGT?

The impact of CGT on investment in the economy, both from domestic andforeign sources, was raised as far back as the Franzsen Commission in 1969.Whilst some commentators raise concerns regarding the effects of CGT oncapital formation, risk taking, and investment preferences, it should be bornein mind that CGT is widely accepted internationally. The impact upon the South African economy will be managed by the judiciouschoice of options with regard to effective date, base cost (opening values ofcapital assets), exemptions, rollover (deferral) relief, relief available on assetsacquired before the effective date, inclusion rate relief and rate structure.These aspects are spelt out later in this guide. A further factor that shouldlessen economic distortion is relative certainty in respect of the principles orcharacteristics of CGT and hence, the reason for this guide’s existence.

c) What does all this mean to you the taxpayer?

Until the implementation or effective date, you will still be taxed on theincome you earn from owning assets, but will not generally be taxed on profitsarising from the disposal of those assets. For example, you will be taxed onincome such as rent and interest but not on the profits from selling yourshares, property or other investments, unless you acquired such assets with theintention of disposing of them in a scheme of profit-making.

After the effective date this will change. All capital gains or losses made onthe disposal of capital assets will be subject to CGT unless excluded byspecific provisions. However, where an asset was acquired before the effectivedate and disposed of thereafter, tax will only be payable on the capital gainwhich accrued after the effective date. The tax to be paid will be reducedfurther in all cases by only including a percentage of the gain in taxableincome.

In order to have some understanding of the characteristics of the proposedCGT in South Africa, it is appropriate to commence with a diagram reflectingthe basic framework of CGT, as well as a simple example, before the issuesare discussed in any detail. A flowchart of the CGT process may be found onpage 34.

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Basic framework of CGT

CGT event (disposal or deemed disposal)

Exemptions or rollover (deferral relief)

Apply time-based apportionment or value assets held on the effective date

Test for R1,000 per annum primary exclusion (natural persons only)

Inclusion rate relief

Legal person Tax return Natural person 50% 25% inclusion of inclusion of realised gain realised gain(Companies etc.) (Individuals)

Example 1An individual taxpayer paying tax at the maximum marginal rate of 42%acquired shares listed on the JSE for investment purposes 6 months after theimplementation of CGT for R10,000 and disposed of all those shares 2 yearslater for R12,000. Assuming that the taxpayer was not considered to be atrader in shares, that this was the taxpayer’s only capital asset disposal for theyear and that there were no changes to the tax rate over this period, how wouldCGT work?

• Is the asset on revenue account? No, therefore the capital gain falls within the CGT regime rather than the

normal income tax regime.

• Did a CGT event occur? Yes, the shares were disposed of, ownership changed.

• Does an exemption or rollover (deferral) relief apply? No, shares disposed of are not specifically exempted nor is ‘rollover’ relief

applicable.

• Do the capital proceeds exceed the base cost? Yes, by R2,000 (R12,000 – R10,000), therefore a capital gain exists.

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• Was the asset held before the effective date? No, the asset was acquired 6 months after the effective date and time-

based apportionment does not apply to listed shares (see (i) below on page17).

• Does the R1,000 per annum primary exclusion apply? Yes, as the taxpayer is a natural person, it does apply. Applying the

R1,000 primary exclusion means that only R1,000 of the capital gain issubject to CGT. (R2,000 – R1,000 [primary exclusion])

• Did the capital asset belong to a natural person? Yes, as already considered, therefore, only 25% of the gain (see (j) below

on page 21) or R250 (R1,000 x 25%) is included in normal taxable incomein the tax year in which the disposal occurred.

• How much tax is payable? The taxpayer pays tax at the maximum marginal rate of 42%, therefore

R105 (R250 x 42%) of normal income tax payable is attributable to CGT.(Effective rate of tax on this capital gain is 5,25% [R105/R2,000])

2. CHARACTERISTICS OF CGT

The answers to the following questions reflect the characteristics that are proposedfor CGT in South Africa.

a) Who is liable to pay CGT?

Any natural person (individual) or any legal person (including a company, aclose corporation or a trust) resident in the Republic, as to be defined for thepurposes of the switch to the residence basis of taxation, in respect of capitalassets held both in the Republic and outside of the Republic.

In the event of a cessation of residence, deemed disposal rules will take effectin order to prevent tax avoidance (see (d) below on page 10).

Where a natural or legal person is not resident in the Republic, a liability inrespect of CGT will arise where a CGT event (a disposal or a deemeddisposal) occurs in respect of:

• Immovable property (including mineral rights) or interests in immovableproperty situated in the Republic. For example, land held directly orthrough a ‘closely held’ entity. (Closely held being where the entity iscontrolled by a small number of shareholders or members.)

• Those assets of any permanent establishment, fixed base, branch or agencyin the Republic through which a trade, profession or vocation is beingcarried on.

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This treatment is consistent with international practice, as most countriesoperating a CGT regime only tax capital gains of foreigners in respect ofimmovable property and assets utilised in a trading activity. It is alsoconsistent with South Africa’s agreements with foreign countries for theavoidance of double taxation.

b) What are affected capital assets?

Affected capital assets are considered to be property of any kind, includingassets that are movable or immovable, tangible or intangible, excludingtrading stock and mining assets qualifying for an income tax deduction ascapital expenditure.

In essence, apart from the exclusions mentioned above, all assets regardless oftheir nature are considered affected assets and therefore subject to CGT. Forexample, land, mineral rights, office blocks, plant and machinery, motorvehicles, boats, caravans, trademarks, goodwill, shares and Kruger Rands areall subject to CGT, unless specifically exempted (see (e) below on page 11) orrollover (deferral) relief is applicable (see (f) below on page 12).

Important i‘Property’ is considered to mean any right in or to property including anyfiduciary, usufructuary, beneficial or other like interest in property.

‘Trading stock’ is considered to include any property held on revenue account.For example, a share trader holding shares in a trading portfolio will be taxedon the proceeds upon disposal under the normal income tax regime and notunder the CGT regime.

c) What is included in the base cost of an affected capital asset?

Base cost includes those costs actually incurred in acquiring, enhancing ordisposing of a capital asset and may include:

• Acquisition costsThose costs actually incurred in acquiring the asset. If the asset wasacquired by way of a gift or an inheritance, the base cost in the hands ofthe donor or the deceased is carried forward, i.e. the original pre-exchangebase cost is carried forward (see (f) below on page 12). If the asset is onethat you created yourself, for example, the goodwill of a business, anycapital expenditure actually incurred in creating the asset may form part ofthe base cost, to the extent that the expenditure has not been claimed fornormal income tax purposes.

• Incidental costs of acquisition and disposalAny cost actually incurred and directly connected to the acquisition ordisposal of an asset. For example, legal fees, agent’s commission, stampduty, transfer duty, costs of conveyance, advertising costs, broker’s feesand valuation costs.

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You may not include any costs you incur in resolving any disagreementregarding a valuation, if so elected, as part of base cost.

• Capital costs of maintaining title or rights to the assetThese would include for instance, legal costs actually incurred in respectof a court dispute relating to maintaining your right or title to an asset youown.

• Improvement / enhancement costsThose costs actually incurred for the purpose of improving or enhancingthe value of the asset, as long as the improvement or enhancement is stillreflected in the state or nature of the asset at the date of disposal.

• VATVAT paid and not claimed or refunded may form part of base cost.

Current costs such as interest, repairs, insurance premiums and rates and taxes,may not form part of base cost. These costs would normally be on revenueaccount, rather than being capitalised. Where the costs are of a personal natureor are not expensed in the production of income, such as interest incurred inpurchasing shares for investment, no deduction is permissible on revenueaccount under normal income tax rules. (Refer to section 23 of the Income TaxAct, 58 of 1962, in this regard). However, this does not change the principlethat current costs are on revenue account and are therefore not permitted toform part of base cost.

Example 2An individual taxpayer acquired a second townhouse shortly after the CGTeffective date with the sole intention of generating a rental income. The totalcost of acquisition amounted to R450,000 and a tenant took occupation of theproperty immediately after it had been acquired and occupied the townhouseright up until the taxpayer sold it, 4 years later.

As the garden was larger than normal and at the insistence of the tenant, whowas prepared to pay a higher rental, the taxpayer put in a swimming pool and asauna for R50,000 cash, 2 years after acquiring the townhouse.

The property, being in a sought after area, was sold for R800,000 and agent’scommission of R52,000 was paid. The original cost of R450,000 was bondedin full. During the course of ownership the taxpayer had incurred thefollowing expenses:

Interest on bond over the property - R264,822 Insurance premiums on the property - R 9,600 Rates and taxes - R 15,000 Townhouse complex levies - R 33,600 Repairs to a leak in the roof - R 1,500 Total costs incurred R324,522

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Rental income received during this time amounted to R360,000

What may be included in base cost?Acquisition cost - R450,000Improvement / enhancement cost - R 50,000Agent’s commission upon sale - R 52,000Total base cost - R552,000

What capital gain is realised upon the sale of the property?Proceeds upon sale of property - R800,000Less: Total base cost - R552,000Capital gain realised - R248,000

What about the current costs incurred in maintaining the property?These costs may not form part of the base cost. As rental income amounting toR360,000 was generated during the course of ownership these current costsamounting to R324,522 would have been deducted against this income withthe net profit being subjected to normal income tax.

What if the property was a holiday home at the coast and there was norental income during the period of ownership?As no domestic or private expenses, or expenses not incurred in the productionof income, are permissible as deductions against taxable income in terms ofnormal income tax rules, these current costs would not be deductible againstrevenue account. However, their identity would not change and they wouldnot be allowed to switch over to capital account. Hence, they would not formpart of base cost, even though they may not be utilised on revenue account.

The proposed record keeping requirements for expenses included in base costare discussed in (l) below on page 29.

d) When is CGT triggered?

CGT will be triggered upon a CGT event. In essence a CGT event is when adisposal or deemed disposal (as described below) takes place.

As a general rule, an asset is acquired or disposed of whenever there is achange in the ownership of the asset. Disposal can occur when an asset is:

• Sold,• Given away (see (f) below on page 12),• Scrapped,• Exchanged, for example, a share swap,• Lost (see (f) below on page 12),• Destroyed (see (f) below on page 12), or• When it is redeemed or cancelled.

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A number of rules will deem a disposal to have occurred and they include thefollowing:

• Where a natural person (an individual) or a legal person (an entity) ceasesto be resident in the Republic.

• Where ownership of an asset does not change but for all intents andpurposes disposal does occur. For example, certain derivative and value-shifting transactions.

• Where the beneficial interest in a trust changes.

CGT is a transaction-based tax where realised or deemed realised capital gainsor losses are brought to account on an annual basis by way of inclusion in thenormal income tax return.

No special arrangements are proposed for the payment of CGT in the case of adeemed disposal. As CGT forms part of the income tax regime, a taxpayer hasample time from the date of the deemed disposal to the date of tax returnsubmission and ultimately final assessment to make the necessary paymentarrangements. A taxpayer, as for normal income tax, may approach SARS andenter into an agreement regarding the term of repayment along with interest atthe prescribed rate.

e) What will be exempted?

• A primary / principal owner-occupied residenceThe finer detail in respect of the following still has to be finalised:

– Land owned adjacent to a residence,– What constitutes a homestead in respect of a farm,– Partial usage of a residence for business purposes, and– The identification of the primary / principal owner-occupied residence

where the taxpayer resides in more than one center during the course ofa year.

This exemption is only applicable to a primary / principal owner-occupiedresidence of a natural person.

• Private motor vehiclesAll private motor vehicles except to the extent that the asset is used forbusiness purposes. This exemption is only applicable to private motorvehicles belonging to natural persons.

• Personal belongings and effectsFor example, clothing and effects commonly found within a home. Thiswould include such items as jewellery and ‘collectibles’ (stamps, works ofart, antiques, coins and medallions). However, it excludes such items asboats, caravans and aircraft, share certificates and coins minted in eithersilver or gold. This exemption is only applicable to personal belongingsand effects of natural persons.

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• Lump sum benefits in respect of most superannuation and lifeassurance policiesOn retirement or redemption where the recipient was the originalbeneficial owner or the nominee or dependent of the original beneficialowner of the policy or instrument. For example, lump sums subject to theSecond Schedule of the Income Tax Act, 58 of 1962, life insurancebenefits and lump sums from endowment policies. However, ‘second-hand’ policies are excluded from this exemption.

• Compensation for personal injury or illness, or defamation actionsPayments in this regard are essentially a substitute for restoring the ‘asset’(yourself) to its original state prior to the injury, illness or defamation.

• Betting, lotteries, competitions or the disposition of a chance to win aprize, or a right to receive a prizeWhere a gain is made in a fortuitous manner in any of the above-mentioned instances, i.e. where you are not a professional gambler.

• Foreign legal tender (notes or coins) for personal useIn the event of returning home from a trip abroad and a foreign exchangegain or loss is realised upon converting the foreign currency into Rands.

• Gains or losses made by foreign government agenciesFor example, where a foreign government realises a gain on the disposal ofimmovable property situated in the Republic.

• Small-business assets disposed of where the proceeds are used forretirementThis exemption is only available to small business owners and is in respectof retiring individuals over 55 or where retirement is due to ill-health orinfirmity and the assets have been held for at least 15 years, limited to aone-off exemption per taxpayer of R500,000. If the asset is a membershipinterest such as a share, a ‘look through’ approach will enable theexemption to apply where the interest is linked to an underlying eligibleasset.

• Institutions fully exempt from normal taxationFor example, government departments, local authorities and approvedpublic benefit organisations.

f) Rollover (deferral) of certain capital gains?

Where assets are subject to ‘rollover’, this means that a CGT liability does notarise upon disposal or transfer of ownership but is rather deferred until asubsequent CGT event. In all cases the ‘pre-exchange’ base cost is rolled over.Where assets are transferred by way of exchange, for example, where propertyis contributed to a business in exchange for shares, both assets retain the pre-exchange base cost of the contributed property. Rollover relief is only

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applicable where assets are transferred to residents of the Republic. It isproposed that the following asset disposals be subjected to rollover relief:

• Transfers between members of wholly owned groupsThe concept of wholly owned will make provision for share incentiveownership of up to 10% of a company.

• Transfers by up to 5 persons to a company or close corporationTransfers of assets other than investments upon startup, in exchange forshares or an interest in such company or close corporation. This isdesigned to encourage small businesses.

• Transfers of business assets to a company by a shareholder who afterthe transfer holds at least a 20% shareholding in that company

• Transfers of property from a deceased estate to an heir or legatee

• Donations of property to a donee

• Transfers between spousesIncluding the transfer of any assets pursuant to a divorce order

• Transfers pursuant to a scheme of rationalisation, unbundling,reorganisation, restructuring, or amalgamationSubject to approval by SARS. The extent of the rollover has still to befinalised.

Rollovers where a ‘window’ period applies:

• Involuntary disposals, for example, fire, theft, condemnation andexpropriation, excluding sales in execution of a judgment. If a contract isentered into for the replacement, reconstruction or rectification within oneyear and the replacement asset is brought into use within a period of threeyears, rollover may be applied. In the event that this timeframe is notadhered to, the gain will be taxed at the applicable rate for the year inwhich the asset was originally disposed of, plus interest at the prescribedrate.

• Business asset disposal and re-investment, where an asset utilised in theproduction of income is disposed of and the proceeds are re-invested in asimilar asset, provided that the base cost is no less than that of the assetdisposed of. Where the asset disposed of is a depreciable asset, the rolloveronly applies to the capital gain or loss and not to any recoupment requiredin terms of normal income tax provisions. Such a re-investment must occurwithin one year, or at the discretion of SARS, may be extended up to amaximum of 18 months.

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g) How are capital gains / losses determined?

A capital gain or loss is the difference between the base cost of an affectedasset and the consideration realised or deemed to be realised upon the disposalor deemed disposal of that same asset.

Where the capital asset was acquired before the effective date, time-basedapportionment (see (i) below on page 17) is applied. A taxpayer then offsetscapital losses against capital gains. Capital losses may only be deductedagainst capital gains and may not be offset against income from other sources.However, where the assets are depreciable assets, only capital gains fall withinthe CGT regime. Losses, scrapping allowances and recoupments still fallwithin the normal income tax regime.

‘Personal-use’ assets (those assets not used for business purposes) generallylose value as a result of personal consumption. Accordingly, where a capitalloss arises upon the disposal of such a personal-use asset, the loss is notpermitted. On the other hand, where a capital gain arises, only that portion inexcess of the base cost is to be accounted for in the CGT regime, i.e. anyrecovery of personal consumption is not taxed.

A R1,000 per annum primary exclusion will apply to a net capital gain / loss inrespect of all capital assets disposed of by a natural person during the courseof a tax year, before any inclusion rate relief is given. Thus the first R1,000 ofa net gain or loss for a tax year will fall outside of the CGT regime.

Where the net capital loss exceeds R1,000, the excess may be carried forwardto future years of assessment. Net capital losses in respect of disposals by legalpersons, where such capital assets were used in the production of income, maybe carried forward to future years of assessment.

Example 3An individual taxpayer acquired shares listed on the JSE for investmentpurposes 6 months after the effective date of CGT for R10,000 and disposedof all those shares 2 years later for R10,500. The taxpayer was not consideredto be a share dealer for tax purposes. In the same year, 6 months before theshares were sold, the taxpayer disposed of a speedboat for R10,000. This assethad been acquired 8 years before the effective date for R20,000. No othercapital gains or losses arose during the course of this tax year.

• Are the assets on revenue account? No, the taxpayer did not trade in shares or speedboats, therefore these

transactions fall within the CGT regime rather than the normal income taxregime.

• Did a CGT event occur? Yes, both capital assets were disposed of, ownership changed.

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• Does a specific exemption or rollover (deferral) relief apply? No, neither asset disposed of is specifically exempted, nor is rollover relief

applicable.

• Do capital gains or losses arise? Shares – a capital gain arises (not a personal-use asset) Speedboat – a capital loss arises (a personal-use asset)

• Were any of the assets acquired before the effective date? Yes, the speedboat was acquired 8 years before the effective date,

therefore, time-based apportionment is to be applied (see (i) below on page17) in respect of this asset and a capital loss of R2,000 is determined.

R20,000 – R10,000 = R10,000 x 2/(8+2) = R2,000

As this capital loss relates to a personal-use asset, it is excluded from theCGT regime.

• What is the chargeable or net position for the year? Capital gain = R 500 (R10,500 – R10,000) Capital loss = R Nil (As calculated above, but excluded – personal-use) Net gain = R 500 (R500 – R0)

• Does the R1,000 per annum primary exclusion apply? Yes, as the taxpayer is a natural person, it does apply. As the net capital

gain is less than R1,000 it now falls outside of the CGT regime.

Example 4Same as for example 3, except the shares were disposed of for R7,000 and theboat was disposed of for R22,000.

The first three questions asked in example 3 should also be asked in thisexample before continuing.

• Do capital gains or losses arise? Shares – a capital loss arises (not a personal-use asset) Speedboat – a capital gain arises (a personal use asset)

• Were any of the assets acquired before the effective date? Yes, the speedboat was acquired 8 years before the effective date,

therefore, time-based apportionment is to be applied (see (i) below on page17) in respect of this asset and a capital gain of R400 is determined.

R22,000 – R20,000 = R2,000 x 2/(8+2) = R400

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• What is the chargeable or net position for the year? Capital loss = R3,000 (R10,000 – R7,000) Capital gain = R 400* (As calculated above) Net loss = R2,600 (R3,000 – R400)

* = Remember, capital gains on personal-use assets fall within the CGTregime.

• Does the R1,000 per annum primary exclusion apply? Yes, as the taxpayer is a natural person, it does apply. The net capital loss

is reduced by R1,000, and now amounts to R1,600, which falls within theCGT regime.

• What happens to this capital loss? As this net capital loss falls within the CGT regime it may be carried

forward to subsequent tax years.

h) Are there any anti-avoidance measures?

A number of rules are being considered, most notably the following:

• Financial products – these may be used to allow a recognised lossalthough an equal unrecognised gain exists, or to allow for the economicbenefits of a disposal without a formal change in ownership. (SARS isconsidering more fully the likes of hedging transactions1, ‘straddle’transactions2, ‘wash’ sales3 and certain other derivative transactions).

• Certain asset transfers – where assets concerned straddle the effectivedate, for example, where an asset is acquired after the effective date but isplaced in a company, the shares of which were acquired before theeffective date. The company holding the asset is then disposed of. Suchrules will prevent the misuse of time-based apportionment.

• Market value substitution – where it is determined that any transactionafter 23 February 2000 has artificially overstated the base cost of an asset,the base cost will be adjusted appropriately and severe penalties will beimposed.

• Changes in ownership or other transactions occurring solely or mainlyfor the purpose of utilising any assessed capital loss – set-off of the capitalloss will be disallowed.

1 Hedging represents a legitimate and important business activity whereby risk is reduced and generally involves the purchase of an asset, such as an option or forward contract, that is not being held for sale to customers. Hedging can also be used to accelerate losses and defer gains.2 Straddle transactions are transactions where there is no economic risk but there is a gain and loss produced. The taxpayer can recognise the loss in the current taxable year and defer the gain to a subsequent year.3 Where, for example, the taxpayer sells ‘loss’ assets right at the end of the tax year and purchases substantially identical assets in the new tax year.

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Other anti-avoidance measures will also apply from 23 February 2000 to othertransactions that are undertaken for the purpose of avoiding the impact ofCGT. Penalties will be imposed where anti-avoidance measures are invoked.

i) What if an affected asset is acquired before the effective date?

All assets acquired before the effective date and disposed of thereafter aresubject to CGT on a time-based apportionment basis or a valuation basis, if soelected by the taxpayer.

This means that, although an asset acquired before the effective date isaffected by the introduction of CGT, any capital gain or loss accruing up untilthe effective date is not subject to CGT. Only capital gains or losses accruingafter the effective date are subject to CGT.

Consider the following diagram:

Acquisition Date Effective Date Disposal Date

Capital Gain Capital Gain R300,000 R100,000

Only the capital gain after the effective date, i.e. R100,000, would fall withinthe CGT regime.

The basis of valuation for all marketable shares, bonds, tradable derivativesand other tradable securities listed on a recognised formal exchange will be theaverage of the closing price for the three business days before the effectivedate and the two business days after the effective date. The closing price willbe the average trading price at the close of trading, as reported in the leadingbusiness newspaper of the country where the principal market for the securityis located. The value of foreign securities will be converted using exchangerates as published by the South African Reserve Bank.

Assets, except those listed in the above paragraph, will be subject to CGT on atime-based apportionment basis (whole years or part thereof) upon disposal.Time-based apportionment effectively excludes capital gains made prior to theeffective date. No more than 20 years prior to the effective date may bebrought to account in respect of time-based apportionment. Alternatively, youmay elect to have your assets valued at effective date.

Example 5An individual who acquired a holiday home 10 years prior to the effective dateof CGT for R250,000 sells this same property 5 years after the effective date

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for R850,000. What capital gain will be subject to CGT? Assume that theindividual pays tax at the maximum marginal rate of 42% and that thetaxpayer did not elect to have the holiday home valued. Assume that no othercapital gains or losses arose during the course of this tax year.

Is the asset on revenue account?No, the taxpayer is not a trader of property, therefore this transaction fallswithin the CGT regime.

Did a CGT event occur?Yes, the holiday home was sold.

Does an exemption or rollover relief apply?No, the home is neither the primary / principal owner-occupied residence nordo any of the rollover provisions apply.

Do the capital proceeds exceed the base cost?Yes, by R600,000 (R850,000 – R250,000), therefore, a capital gain exists.

Was the capital asset acquired before the effective date?Yes, the capital asset was acquired before the effective date, time-basedapportionment applies, therefore:

The total capital gain over the 15 year period equals R600,000 (R850,000 - R250,000)

Applying time-based apportionment determines the portion of the capital gainsubject to CGT – R600,000 x 5/(10+5) = R200,000, being that portion of thecapital gain attributable to the period after the effective date.

Does the R1,000 per annum primary exclusion apply?Yes, as the taxpayer is a natural person, it does apply, therefore, the capitalgain is reduced by R1,000. The gain now amounts to R199,000, after time-based apportionment and the R1,000 primary exclusion, and is now subject toCGT.

Is the taxpayer a natural person? (See (j) below on page 21)Yes, as discussed, the taxpayer is a natural person and therefore, only 25% ofthe capital gain, as calculated above (R199,000), is taxed.

Applying this relief, R199,000 x 25% = R49,750

What tax is payable?R49,750 is all that is included in the taxpayer’s taxable income. Assuming amaximum marginal tax rate of 42% means that the CGT attributable to thiscapital gain is R20,895 and the effective income tax rate in relation to thisgross gain is, in this case, 3,5% (R20,895 / R600,000)

19

Appropriate methods of apportioning a capital gain in the case of multipleenhancements / improvements to a capital asset both before and after theeffective date are still being considered. A suggested approach is illustrated inexample 6 below.

Example 6A company acquired an office block 16 years prior to the effective date ofCGT for R250,000. The taxpayer added a set of storerooms for R60,000 twoyears before the effective date and built a new wing for R300,000 a year afterthe effective date. The taxpayer sells the office block for R2,000,000, twoyears after the effective date, and does not intend replacing it, i.e. rolloverrelief is not applicable.

• Was the capital asset acquired before the effective date? As portion of the capital asset was acquired before the effective date, time-

based apportionment applies to this portion of the capital asset. However,before time-based apportionment can be applied, an additionalapportionment based on weighted cost is required in order to determinewhat portion of the proceeds of disposal relates to what portion of thecapital asset acquired before the effective date.

WeightedApportionment

Total Office Storerooms New Wing

Cost 610,000 250,000 60,000 300,000Weighting factor * 4 1 1Adjusted Cost 1,360,000 1,000,000 60,000 300,000Percentage 100% 73.5% 4.4% 22.1%

Proceeds 2,000,000 1,470,588 88,235 441,176Cost 610,000 250,000 60,000 300,000Gain 1,390,000 1,220,588 28,235 141,176

Time-based 2 / (16 + 2) 2 / (2 + 2) 100%Subject to CGT 290,915 135,621 14,118 141,176

* = Weighting factor table below, is to be used to determine the appropriate factor.

Weighting Factor TableYears Acquired BeforeImplementation Date

Weighting Factor

0 – 9 110 – 14 215 – 19 4

20 + 8

The use of a weighting factor is suggested as a relatively simple method to prevent theover allocation of proceeds on disposal to more recent costs, which would otherwise takeplace due to the fall in the purchasing power of the Rand. The weighting factors used arebased on CPI figures obtained from Statistics South Africa.

20

• Does the R1,000 per annum primary exclusion apply? No, a company does not qualify for this primary exclusion.

• Is the taxpayer a natural person? (See (j) below on page 21) As the taxpayer is not a natural person, the inclusion rate relief provides

that 50% of the capital gain as calculated above, is taxed.

Applying this relief, R290,915 x 50% = R145,458

• What tax is payable? R145,458 is included in the taxpayer’s taxable income and taxed at the

corporate rate of 30%. The capital gains tax payable is thus R43,637. If thetaxpayer were to declare the entire after tax gain as a dividend, STC wouldbe applicable and an amount of R149,596 ((R1,390,000 – R43,637) x12,5/112,5) would be payable. Tax of R193,233 would then be payable, intotal.

Important iWhere you elect to have a valuation carried out in respect of assets other thanmarketable shares, bonds, tradable derivatives and other tradable securitieslisted on a recognised formal exchange, such valuation must occur within 6months of the effective date. The details of valuation are required by SARSand must be supplied in your first income tax return after the effective date.Where these details are not submitted you will be deemed to have electedtime-based apportionment.

Upon disposal or deemed disposal of a capital asset, the calculation of thecapital gain or loss on the valuation basis, if elected, and the time-basedapportionment basis must be submitted in your next income tax return. Wherea valuation basis has been elected, and the calculated capital gain or lossunderstates the capital gain or overstates the capital loss by more than 20%when compared to time-based apportionment, there will be an increasedlikelihood that such valuation will be subjected to further scrutiny by SARS.Where SARS rejects such valuation, a minimum penalty of 40% on thedifference in tax payable will be leviable.

Example 7Using the information in example 5 above, except that the taxpayer had theproperty valued at R750,000 at the effective date and submitted the requireddetails of the valuation with the 2002 income tax return. On the basis of thevaluation the capital gain amounts to R100,000 (R850,000 – R750,000),resulting in tax of R10,395 ((R100,000 – R1,000) x 25% x 42%). SARSscrutinized the valuation as the resultant gain deviated by more than 20% fromthe R200,000 (R600,000 x 5/(10+5)) which results in tax of R20,895((R200,000 – R1,000) x 25% x 42%) that was reached using time-basedapportionment. SARS found that the basis of the valuation was flawed and a40% penalty was imposed.

21

The tax and penalty are follows:

Tax R20,895 ((R200,000 – R1,000) x 25% x 42%)Penalty R 4,200 (R20,895 – R10,395) x 40%Total R25,095

j) Is there any relief on the inclusion of a capital gain in taxable income?

The following inclusion rates are to be applied to net capital gains:

• Legal persons (including companies, close corporations and trusts) 50%• Natural persons (individuals and special trusts) 25%

In other words, a company will only include 50% of a net capital gain intaxable income (50% is exempt from tax) and an individual will only include25% of a net capital gain in taxable income (75% is exempt from tax).

Example 8A capital gain of R50,000 is realised on assets acquired after the effective dateand no other capital gains or losses are realised in this particular tax year.What will be included in taxable income?

Company IndividualCapital gain R50,000 R50,000Primary exclusion - R1,000

R50,000 R49,000Inclusion rate 50% 25%Taxable income R25,000 R12,250

These inclusion rates apply to all affected capital assets regardless of whetheracquired before or after the effective date. In other words, even where time-based apportionment has been applied.

The table below outlines effective tax rates in respect of CGT.

Taxpayer Inclusionrate%

Statutorytax rate

%

Effective taxrate %

Individuals 25 0 – 42 0 – 10,50Retirement Funds 25 25 6,25Unit Trusts (Resident funds) 25 30 7,50Life Assurers• Individual policyholder fund• Company policyholder fund• Corporate policyholder fund• Untaxed policyholder fund

• Retirement fund business• Other exempt business

255050

25N/A

303030

25N/A

7,5015,0015,00

6,25 0,00

Companies (Standard) 50 30 15,00

22

Important iCapital gains and losses are excluded from the computation of provisional tax,based on the irregular nature of such items.

k) What other issues might be of concern?

• Unit trusts / property unit trustsThe capital gains or losses of resident unit trusts are determined and taxedin the trusts at company tax rates, after applying relief appropriate toindividuals (natural persons). Disposals of units in a resident unit trust are,therefore, generally not subject to CGT in the hands of the holder.However, they would be taxed under the normal income tax regime if theholder trades in such units. Where a unit trust is non-resident, capital gainsor losses are determined and taxed upon disposal of the units. Thefollowing table considers the effective rates of tax for the two treatmentsoutlined above. The higher rates applicable to non-resident unit trusts havebeen designed to take into account the deferral benefit of investing in anon-resident unit trust.

Investor Resident Unit Trust Non-resident Unit TrustLegal Person 7,5% (30% x 25%) 15,0% (30% x 50%)Natural Person 7,5% (30% x 25%) 10,5% (42% x 25%)*

* = Natural persons are taxed at their applicable marginal rates.

• Long-term insurersThe trustee principle in the four-fund approach implies that an appropriateinclusion rate should be selected for each fund. Thus, for example, therelief applicable to individuals is applied to gains in the individualpolicyholder fund. The inclusion rate relief and effective tax rate for eachfund is shown in paragraph (j) on page 21.

• Retirement funds taxThe RFT rate after relief applicable to individuals (natural persons) is to beapplied. However, Government is in the process of reviewing the taxtreatment of the retirement fund industry in the light of the introduction ofCGT. Consideration will also be given to granting relief in respect of gainsattributable to pensioners of retirement funds as in the case of theretirement fund tax.

• Disposal of sharesWhere there is a disposal of shares which forms part of a holding ofidentical shares, i.e. shares of the same class and in the same company, thetaxpayer may elect to adopt the ‘first-in, first-out’ (FIFO) basis or theweighted average (pooled) basis to determine the base cost of sharedisposals. Once an election has been made regarding the basis adopted,

23

such election is binding in respect of all other share disposals, where suchshares form part of a holding of identical shares.

Example 9The following share transactions of an individual taxpayer are listed belowand all relate to identical shares, of the same class, of the same companylisted on the JSE. Disregard incidental costs of acquisition or disposal forthe purpose of this example and assume that the taxpayer is not consideredto be a trader of shares for income tax purposes. Assume that no othercapital gains or losses arose during the course of the tax year in question.

Purchase - 31 October 1995 200 shares @ R 5,00 each R1,000Purchase - 31 January 1996 300 shares @ R 6,00 each R1,800Sale - 31 January 1999 200 shares @ R 9,00 each R1,800Effective Date - 1 April 2001Purchase - 31 October 2001 300 shares @ R11,00 each R3,300Purchase - 31 August 2002 100 shares @ R 9,00 each R 900Sale - 30 November 2003 200 shares @ R12,00 each R2,400

The average trading price of shares for this listed company calculated over5 business days at the effective date was R10,00 per share.

• What is the base cost of shares held at the effective date? As the 5 business day average is the basis to be adopted in respect of

marketable shares at the effective date, the taxpayer, therefore, holds300 shares @ R10,00 each.

• What about the 200 shares sold in January 1999? As this sale occurred before the effective date, any capital gain made at

that time falls outside of the CGT regime.

• What is the realised capital gain or loss upon the sale of the 200shares in November 2003?

The taxpayer may elect either the FIFO (first-in, first-out) or weightedaverage (pooled) basis in determining the capital gain or loss. It mustbe remembered, however, that once a basis has been elected, such basiswill be binding upon the taxpayer for all partial disposals of sharesfrom then on.

Shareholding at the time of the 30 November 2003 disposal:

1 April 2001* 300 shares @ R10,00 each R3,000 31 October 2001 300 shares @ R11,00 each R3,300 31 August 2002 100 shares @ R 9,00 each R 900 700 R7,200

* = Effective Date

24

FIFO basis 200 shares were sold @ R12,00 on 30 November 2003. The total

proceeds in respect of this sale amount to R2,400. Using the FIFObasis means that 200 shares of the holding of 300 at the effective dateare deemed to have been disposed of. Therefore, the base cost of theshares disposed of amounts to R2,000 (200 x R10,00).

The capital gain is therefore, R400 (R2,400 – R2,000). Applying theprimary exclusion means that no capital gain or loss less than a R1,000per annum is subject to CGT, therefore the R400 gain is not subject toCGT.

Weighted average (pooled) basis The total number of shares held at the date of disposal amounted to

700. Their total cost amounted to R7,200. The weighted average cost ofeach share, therefore, amounts to R10,29 (R7,200 / 700).

The base cost of the shares disposed of amounts to R2,058 (200 xR10,29).

The capital gain, in this case, is R342 (R2,400 – R2,058). Applying theprimary exclusion means that no capital gain or loss less than a R1,000per annum is subject to CGT, therefore the capital gain of R342 is notsubject to CGT.

Generally, in respect of shares, the following are being considered asspecial rules to be incorporated in the CGT legislation:

• Bonus / capitalisation shares,• Rights and options to acquire shares,• Convertible notes,• Share incentive schemes,• Lending arrangements.

• Consideration (payment) due after the time of disposalAs the disposal consideration includes amounts which the taxpayer isentitled to receive, a capital gain or loss may arise in a particular year eventhough the relevant amounts have not been received until a subsequentyear or years. These capital gains or losses will be brought to account forCGT purposes at the date of disposal. In other words, taxpayers are nottaxed on a ‘profit-emerging’ basis in respect of CGT. As CGT operates ona realisation rather than a cash basis, and relief is available, such treatmentis not considered unreasonable. However, where payment is contingentupon an event or events, a capital gain or loss may not be brought toaccount until such time as the event or events have occurred.

25

• Cancelled transactionsFollowing on from the above bullet point, one way to deal with cancelledtransactions would be as follows:

Example 10An individual taxpayer disposed of an ocean-going yacht, acquired afterthe effective date for R60,000, in February of the particular year. Theyacht originally cost the taxpayer R50,000 and was considered to be acapital asset. The purchaser agrees to pay 12 equal instalmentscommencing from the end of October of that year. The taxpayer has aFebruary tax year-end, tax is paid at the maximum marginal rate of 42%and there are no other capital gains or losses for the year.

What assessable capital gain will be included in the taxpayer’s return forthe tax year in question?

• Capital gain = R10,000 (R60,000 – R50,000)• Deduct R1,000 per annum primary exclusion (R10,000 – R1,000)• Apply 25% inclusion rate relief (R9,000 x 25%)• Capital gain subject to CGT = R2,250

Scenario A – the sale falls through in November without a single instalment having been paid.Assuming that the taxpayer had no right of recourse as the contract signedwas defective, and having contemplated legal action, was satisfied tomerely take repossession of the yacht. How will this cancellation betreated for CGT purposes?

As the taxpayer’s tax return has already been submitted, the taxpayer mayapply to have the assessment revised with any overpayment of tax beingrefunded.

Scenario B – the sale falls through after the purchaser has paid R5,000 (1 instalment) in December.Assume the same contractual defects as for scenario A, however, thepurchaser abandons the R5,000 first instalment and the seller takesrepossession of the yacht.

The abandonment of the R5,000 by the purchaser is treated in the samefashion as a forfeiture of a deposit (see next bullet point) in the purchaser’shands.

However, the seller has been enriched and an enrichment is deemed to be achargeable gain (even if the asset was exempt from CGT such as a primary/ principal owner-occupied residence).

26

As the taxpayer’s tax return has already been submitted, the taxpayer mayapply to have the assessment revised. The capital gain to be returned inrespect of the enrichment is R1,000 (R5,000 – R1,000[primary exclusion]x 25%) rather than the R2,250 as originally calculated. Any overpaymentof tax will be refunded.

Scenario C – the sale falls through after the purchaser has paidR15,000 (3 instalments) in February of the followingyear.

Assume the same contractual defects as for scenarios A and B, however,the purchaser abandons the R15,000 being three instalments and the sellertakes repossession of the yacht.

The abandonment of the R15,000 by the purchaser is treated in the samefashion as a forfeiture of a deposit (see next bullet point) in the purchaser’shands.

However, the seller has been enriched and an enrichment is deemed to be achargeable gain (even if the asset was exempt from CGT such as a primary/ principal owner-occupied residence).

As the enrichment exceeds the capital gain returned, the taxpayer may notrequest a revised assessment. However, the balance must be returned in thefollowing tax year. The capital gain to be returned in respect of the balanceon enrichment is R3,500 (R15,000 – R1,000[primary exclusion] x 25%).The R1,000 per annum primary exclusion applies as the enrichment isdeemed a chargeable gain. Therefore, a capital gain amounting to R1,250(R3,500 – R2,250) will be returned in the next tax year. It has beenassumed that there are no other capital gains or losses in the next year taxyear for this taxpayer.

• Forfeiture of a depositThe forfeiture of a deposit is treated as if it were an abandonment by thepurchaser paying the deposit. Therefore, this abandonment is not treated asa disposal in the hands of the purchaser. The deposit lost does not fallwithin the CGT regime and therefore, no loss can be claimed.

On the other hand, there is a disposal of an asset (the option, binding thegrantor to sell) by the seller who receives the deposit. This forfeiteddeposit is treated as the consideration received by the seller and is achargeable capital gain even if the asset concerned is exempt in terms ofCGT.

• Part-disposals of capital assetsWhere part of a capital asset has been disposed of, and part retained (or aninterest in the asset retained, excluding interests listed on a recognised

27

formal exchange), the base cost of the part disposed of must be determinedby applying an appropriate apportionment method.

• Depreciable assetsGains over the original cost of depreciable assets, realised on the disposalof these assets, are now taxed on capital account. However, the treatmentin respect of losses and upon scrapping of such depreciable assets stillremains within the normal income tax regime.

Example 11An individual taxpayer, using a private motor vehicle 50% of the time inorder to carry on an unincorporated business, disposes of the vehicle. Thevehicle was acquired shortly after the effective date for R100,000,including VAT, and disposed of exactly three years later. The vehicle wasdepreciated at 20% per annum on the straight-line basis. Consider thefollowing scenarios:

Scenario A – sale for greater than original costThe taxpayer sells the motor vehicle for R120,000. What are the taximplications upon disposal?

Total Business PrivatePercentage 100% 50% 50%Cost R100,000 R50,000 R50,000Wear and Tear R 60,000 R30,000 R30,000¤Adjusted Base Cost R 40,000 R20,000 R20,000

Sold R120,000 R60,000 R60,000Adjusted Base Cost R 40,000 R20,000 R20,000Excess R 80,000 R40,000 R40,000

Business excess split as follows:- Recoupment (revenue account) R30,000 -- Capital gain / (loss) (capital account) R10,000 -*

¤ = Not an allowable deduction for income tax purposes.

* = Motor vehicles are specifically exempted, therefore the capital gaindoes not fall within the CGT regime.

Assume that all of the above information relates to an ocean-going yachtinstead of a motor vehicle and that the taxpayer is not a VAT vendor. Thesplit between business and private usage is also on a 50/50 basis. Therecoupment in respect of normal income tax (revenue account) would stillamount to R30,000, however, the total capital gain subject to CGT (capitalaccount) would amount to R20,000 as there is no specific exemption foryachts as there is in respect of private motor vehicles.

28

Scenario B – sale for less than original costThe taxpayer sells the motor vehicle for R80,000. What are the taximplications upon disposal?


Sold R80,000 R40,000 R40,000Adjusted Base Cost R40,000 R20,000 R20,000Excess R40,000 R20,000 R20,000

Business excess split as follows:- Recoupment (revenue account) R20,000 -- Capital gain / (loss) (capital account) - -


In respect of the yacht considered in the above scenario, as 50% relates toa personal-use asset, the same treatment as for the motor vehicle wouldresult.

Scenario C – asset scrappedThe taxpayer scraps the asset as result of an accident and receives R20,000from a scrap-dealer. What are the tax implications upon disposal?


Sold R20,000 R10,000 R10,000Adjusted Base Cost R40,000 R20,000 R20,000Shortfall (R20,000) (R10,000) (R10,000)

Business shortfall split as follows:- Scrapping allowance (revenue account) (R10,000) -- Capital gain / (loss) (capital account) - -


In respect of the yacht considered in the above scenarios, as 50% relates toa personal-use asset, the same treatment as for the motor vehicle wouldresult.

29

l) What records need to be kept?

The onus of proving base cost rests with you, the taxpayer. A clear distinctionneeds to be drawn between capital assets acquired before the effective dateand those acquired after the effective date. Where such proof of base cost isnot on hand, in respect of capital assets acquired before the effective date,20% of the proceeds upon realisation will be deemed to be the base cost forCGT purposes. This presumptive concession is only in respect of capital assetsacquired before the effective date. Where the capital asset was acquired on orafter the effective date and no record of base cost has been kept, or SARS hasreason to believe that this is the case, the base cost will be deemed to be nil.

• General informationIf you acquire an asset on or after the effective date, the followinginformation or records must be kept:

– The date you acquired the asset.– Details of any amounts which will form part of the base cost of the

asset upon disposal.– The date you dispose of the asset.– Details of any consideration received in exchange for the asset.

These documents could include:

– Copies of contracts of purchase and sale.– Market valuations, where elected.– Invoices and receipts (or bank stamped cheques) for services rendered.– Advice notices relating to amounts paid by you to entities in which you

have an interest.

Important iYou must keep records relating to your ownership and all the costs of suchassets for 4 years from the date SARS acknowledges receipt of yourincome tax return reflecting the disposal. If you are not required to rendera return and an asset was disposed of for more than R10,000 these recordsshould be kept for 5 years from the date of disposal.

• What you need to do if you have not kept recordsIf you acquired assets on or after the effective date and have not keptrecords or your records have inadvertently been destroyed, you can still dosomething about it.

– If you have bought immovable property, your attorney or estate agentwill have kept copies of most of the records you need. You should beable to obtain copies if you ask for them.

– If you have made improvements or enhancements to immovableproperty, for example, built an extension, you can ask for a copy of theinvoice from the builder.

30

– If you have bought shares in a listed company, your stockbroker orinvestment advisor should be able to supply you with the informationyou need.

• Types of records to be kept for some common assetsThe following information may be useful in helping you work out thetypes of records you should keep for some common assets:

– Records relating to immovable propertyImmovable property includes such property as the family home, vacantplots of land, business premises, rental properties, holiday houses etc.

Important iEven though your primary / principal owner-occupied residence isexempt, it is advisable to keep all records relating to this residence, justas you would for other items of immovable property. If this residencebecomes a secondary residence at some time in the future, you willneed to know the full cost of the residence so that you do not pay moreCGT than necessary. If you do not have sufficient records,reconstructing them could be difficult.

On acquiring a property, your costs could include:

♦ Purchase price, the amount paid to the seller,♦ Transfer duty,♦ Stamp duty,♦ Legal fees for contract preparation and conveyance,♦ Valuation fees.

On disposing of a property, your costs could include:

♦ Commissions paid to an estate agent or auctioneer,♦ Attorney’s fees,♦ Advertising costs,♦ Electrician’s certificate.

If you improve or enhance (not replace) the property once you havebought it, your costs in this regard could include:

♦ Constructing a new building,♦ Building an extension,♦ Landscape gardening,♦ Constructing a swimming pool♦ New paving,♦ Built-in appliances, for example, ovens and hobs.

31

– Records relating to a businessA business usually owns a number of assets. However, you will needto keep records in order to determine the base cost of such assets.Maintaining a complete fixed asset register for all business assets is agood business practice that assists with other non-tax issues, such asinsurance claims.

– Records relating to shares in listed companiesOne of the more common investments that people make is thepurchase of shares listed on the JSE. Most of the records that you willneed to keep to work out your CGT when you dispose of theseinvestments will be given to you by the company, your investmentadvisor or stockbroker. It is very important for you to keep everythingthat they give you in relation to your shares.

These records will generally provide the following importantinformation:

♦ The cost price of the shares and the date they were purchased,♦ The sale price if you sell them and the date they were sold,♦ Marketable securities tax paid,♦ Commissions paid to brokers when you buy or sell shares.

– Records relating to a capital asset inheritedYou must keep special records when you inherit a capital asset as anheir or legatee. It is imperative that the executor gives you certifiedcopies of all the records relating to the base cost of the inherited asset.In terms of the rollover relief given (see (f) above on page 12) theinherited asset will not attract CGT upon your inheritance but rather inthe event of you disposing of it. However, the base cost ‘rolled over’remains the original pre-exchange base cost.

– Records relating to a capital asset transferred between spousespursuant to a divorce orderIn terms of rollover relief given (see (f) above on page 12) thetransferred asset will not attract CGT upon transferal. However,should you subsequently dispose of the asset, CGT will becomepayable. For this reason you will need to get the original pre-exchangebase cost details as soon as possible from your former spouse orthrough your attorney. These records will be needed in the event ofyour disposing of the asset.

m) What are the administrative procedures for CGT?

CGT forms a part of normal income tax and as such, chargeable net capitalgains or losses are to be included in the normal income tax return andsubjected to rates applicable to taxpayers. Where the taxpayer is a SITEonly taxpayer, an abridged return will be available for completion andsubsequent submission.

32

As noted previously, capital gains and losses are to be excluded from thecomputation of provisional tax, based on the irregular nature of such items.

The general provisions of the Income Tax Act covering such aspects asreturns, assessments, objections and appeals and payment and recovery oftax also apply to the CGT regime.

3. CONTACT PERSONNEL – At the South African Revenue Service

SARS personnel, listed below, may be contacted during normal office hours.

HEAD OFFICE – PRETORIA

Office Contact Personnel Telephone

Head Office “Hotline” Susan Kruger 012-4224912Head Office “Hotline” Victor Masola 012-4224913

EASTERN CAPE AND KWAZULU NATAL REGION


Durban Duncan MacAllister 031-3608911East London Ted Craik 043-7227270Pietermaritzburg Ojay Bridgelall 033-3554611Port Elizabeth Marius Nel 041-5823540Uitenhage Henk Coetzee 041-9910700Umlazi Janet Hadebe 031-9079111Umtata Kidi Tyali 047-5312162

FREE STATE AND NORTH WEST REGION


Bloemfontein Toni Ferreira 051-448 2331Klerksdorp Rita Serfontein 018-464 1551Kroonstad Neil Kotze 056-2122151Mmabatho Tiego Kgomo 018-3841197Rustenburg Helena Botes 014-5922035Vereeniging Linda Bester 016-422 3621 x2204Welkom Shaun Donaldson 057-3528375

33

GAUTENG REGION


Alberton Buti Molefe 011-8615768Benoni Hentie Booysen 011-4211701Boksburg Suzette Viljoen 011-9179556Brakpan Alet Ras 011-7402900 x 0251

Annemarie Pretorius 011-7402900 x 0251Germiston Andre Germishuizen 011-8734160 x 2280

Allan Roos 011-8734160 x 2225Johannesburg Anne Duiker 082 461 2406Krugersdorp Keyter Hawlert 011-9531882Nigel Allan Pienaar 011-8146466Pretoria G.S.D Segone 012-3172190

R. Slump 012-3172515Randfontein Eddie Holmes 082 462 1214Roodepoort Sue Giblin 011-7601886 x 2234Sandton (Corporate Tax Centre) Ivor Davkin 011-7896336

Chris Scholta 011-7896336Soweto Service Point Gusta Nyembe 011-9829496Springs Hannelie Coetzee 011-8155470 x 221

NORTHERN PROVINCE AND MPUMALANGA REGION


Giyani T.V. Rikhotso 015-812 1890Lebowakgomo J.M.S. Molawa 015-633 6100 x245Nelspruit Elphus Sambo 013-7594354Pietersburg Rozena Heine 015-2997085Sibasa T.S. Tshikovhi 015-9633480Standerton Annemarie Beukes 017-712 2140 x2219

Thea Basson 017-712 2140 x2240Witbank Willie van Schalkwyk 013-656 6003 x2209

WESTERN AND NORTHERN CAPE REGION


Beaufort West Hendry White 0201-3235Belville Annamie Carstens 021-9599194

Ida Balzun 021-9599409Cape Town Trudy van Zyl 021-4602006

Rina Thiart 021-4602016Janine Vivier 021-4602223

George Alette Oosthuizen 044-8747420Kimberley Gert Dreyer 053-8312250Paarl Albie Weyers 021-8724614Worcester Gino Giani 023-3420051

34

4. FLOWCHART – Simplified overview of the CGT process

Yes

No

No

Yes

Yes

No

Yes

No

Yes No Yes

Yes

Yes No No

No Yes Yes

No

No Yes

Did a CGT eventoccur during the

tax year?There is no capital gain or loss

Does anexemption orrollover relief

apply?Disregard (or reduce) the

capital gain or loss for CGTpurposes

Do the capitalproceeds exceedthe base cost oreffective date

valuation?

Excess = capital gain

Does the basecost or effectivedate valuation

exceed thecapital proceeds?

Excess = capital loss

Was the asset heldbefore the effective

date and notvalued?

Chargeable capitalgain to income tax

return

Is the assetconcerned on

revenue account?

Cannot fall within the CGTregime

Apply 50% inclusionrate

Apply 25% inclusionrate

Is the capital asset adepreciable asset?

Is the asset a‘personal-use’

asset?

Has the R1,000 paprimary exclusionfor natural persons

been exceeded?

Is the net capital gain realised by a natural person?

Apply time-basedapportionment

Gains (aboverecoupment) within

the CGT regime,losses within normalincome tax regime

Gains withinCGT regime,

losses excluded

Is theresultant

beingdealt witha capital

loss?

Gain / lossoutside CGT

regime

Capital loss to becarried forward

Documents

GUIDE TO CAPITAL GAINS TAX